NPS Investment Option: Understanding Auto Choice And Active Choice

In life, we meet all kinds of people. Some love choices and enjoy going through them to pick what is best for them. On the other hand, some people get overwhelmed when given too many choices. And the confusion means they delay making decisions. This also applies to taking financial decisions.

Keeping this aspect in mind, the NPS (National pension system) also offers subscribers two NPS investment options – a default ‘Auto Choice’ for subscribers who find it tough to decide, and an ‘Active Choice’ for subscribers who wish to take control of their investments.

The difference between the two NPS investment options is self-explanatory. Active choice provides greater say and control in the choice of asset allocation. In contrast, the Auto choice is suitable for people who prefer a passive investment approach. Whatever the choice, the objective of NPS remains the same – build a retirement corpus which also offers tax deductions.

NPS Investment Option

Before dwelling further, let us understand the available fund options in which NPS subscribers can channelize their savings. There are four asset classes in NPS across which contributions can be saved. These are: Equity, Corporate debt, Government Bonds and Alternative Investment Funds. These choices can be exercised across the 10 pension fund managers allowed to manage the NPS funds. Further, each asset class has further defined investments as stipulated by the regulator (See: Asset classes offered by Pension Fund Managers (PFMs) for investment)

What is Active Choice in NPS?

1. This choice is for the NPS subscribers who wish to decide their asset mix on their own.
2. Under this option, subscribers have the option to choose the ratio in which their contributions will be invested among various asset classes. That is, you get a say in your asset mix.
3. However, there are limitations even within this choice, as the maximum permitted allocation to equities is restricted to 75%. This limit was 50% a few years ago and was raised after feedback from subscribers.

What is Auto choice in NPS?

1. The NPS Auto Choice option is for passive investors who seek to let an automatic allocation decide the proportion of money spread across the available asset classes.
2. This allocation adopts a life-cycle-based approach and starts with an equity-heavy portfolio during the subscriber’s younger age and systematically reduces the equity exposure as the subscriber approaches retirement.
3. A life-cycle-based approach optimizes not only the returns but also cushions you from market volatility as you approach maturity.
4. Under the auto choice, the investments are made in a life-cycle fund with three life-cycle funds (LC) to choose from

1. Aggressive Life Cycle Fund: As the name suggests, it takes an aggressive approach to invest where maximum equity allocation can go up to 75%.
2. Moderate Life Cycle Fund: It is the default option which caps the equity exposure to a maximum of 50%.
3. Conservative Life Cycle Fund: In this option, maximum equity allocation is capped at 25%.

Limited Equity Exposure In Active and Auto Choice

The NPS calculation involves evaluating the maximum allowable equity exposure in both the Active Choice and Auto Choice options. Under the Active Choice, an NPS subscriber can allocate a maximum of 75% to equity exposure. In contrast, one has the flexibility to invest up to 100% in corporate or government bonds.

In the case of Auto Choice, the equity exposure is further restricted. The Aggressive Life Cycle Fund permits the highest equity exposure in the Auto Choice option. However, as the subscriber approaches 55 years, the equity exposure gradually tapers down to 15%.

The rationale behind this approach by the PFRDA (Pension Fund Regulatory and Development Authority) is to mitigate the impact of market volatility associated with equity investments as the subscriber nears retirement. By adjusting the equity allocation over time, the Auto Choice option aims to provide a more balanced and stable investment strategy for individuals as they transition into their retirement phase.

Flexibility To Switch NPS Investment Option

• As an NPS subscriber, it is up to you to choose the option you wish to exercise and also the fund manager you wish to invest with.
• The flexibility with NPS allows you to change your fund manager once a year and your scheme of investment four times a year.
• The shift is allowed for investments in NPS Tier I and Tier II accounts.
• These features provide you with alternatives that you can opt for based on your stage in life as well as the asset allocation that you wish to follow.

NPS Auto Or Active, Which Is Better?

If you are unable to decide on which NPS investment option to start with, it may be a good choice to initiate with the default auto choice. Auto choice has a powerful effect on your NPS investments when you can’t decide. Once you start tracking the way in which your contributions in the NPS get allocated into units and its performance; you may get the necessary confidence to manage the allocation on your own and opt for active choice.

FAQ Related To NPS Active & Auto Choice

Under the Active Choice, an investor can choose his asset allocation percentage between Equity(Maximum 75%), Government Bonds(Maximum 100%), Corporate Bonds(Maximum 100%) and Alternate Investment option(Maximum 5%). After this, an investor has to choose from different NPS Pension Fund Managers.

Yes, an investor can change from Active choice to Auto choice or vice versa during a year. This can be changed a maximum of four times a year.

This depends on your risk appetite and overall portfolio allocation. Under Aggressive Choice, there is greater allocation towards Equity as compared with conservative and conservative life cycle funds. Therefore, if this aligns with your risk profile and goals, then it can be a good option for you.

This can be done online easily via platforms like ET Money.

In the Active Choice of NPS, an investor can choose allocation towards different asset classes. You can invest up to 100% in government bonds. The same is true for corporate bonds as well. For equity, however, the maximum limit is 75% and for Alternative Investment Funds (AIFs), it’s 5%. You need to select your asset mix accordingly.

Under auto choice, an investor can choose between aggressive, conservative and moderate life cycle funds. All three options have different asset allocation percentages depending on your age. The same can be found in the table above.

The auto choice is best for investors who don’t want to manage their investments actively. Further, under auto choice, an investor can choose between an Aggressive, Moderate or Conservative Life cycle fund depending on his risk profile. Also, here the asset allocation changes according to the age of the subscriber automatically.

It depends on your investment style. If you want to manage your investment actively, then you can go with active mode. If you do not want to manage your investments actively, then you can go with auto mode.

Under Auto choice, the asset mix in E (equity), C (corporate debt) and G (government bonds) depend on the Life cycle Category the subscriber choose (among the Aggressive, Moderate and Conservative life cycle) and the age of the subscriber. Details on the same can be found in the table above.

Yes, subscribers can change their investment choice, and it can be done up to 4 times a year.

Yes, subscribers can change their investment choice, and it can be done up to 4 times a year.

Share this story

Sridhar Kumar Sahu is a Content Writer for ET Money. He has over six years of experience in covering personal finance topics and markets. He holds a Master’s degree in English Journalism from IIMC, New Delhi and B.Tech in Mechanical Engineering from BPUT, Odisha.